A Drewry survey of shipowners finds concerns over compliance and a general resignation in having to switch to more expensive low-sulphur fuel to meet the IMO’s proposed 2020 bunker regulation.

Decisions over whether to install scrubbers, switch to LNG-propelled ships, or simply bear the extra cost of using more expensive, compliant fuel will be preoccupying all shipowners in light of the International Maritime Organization’s (IMO) proposed new bunker rules that
will place a 0.5% sulphur cap on fuel in 2020 (see Table 1).
Table 1: Changes in bunker regulations from 2020

A survey by Drewry of shipowners of all types of cargo ships found that most respondents (66%) believed the regulation would become enforceable as planned in 2020 (see Question 4). However, over one-quarter thought that the regulation would need to be extended due to a lack of readiness, with concerns ranging from the availability of low sulphur fuel, scrubber installation capacity, LNG infrastructure and potential further changes to legislation.

Q1: Please specify your main business sector

Source: Drewry Maritime Research
Q2: What types of ships do you own/operate?

Source: Drewry Maritime Research

Q3: Approximately, how many ships does your company own/operate?

Source: Drewry Maritime Research
Q4: Do you expect the IMO global emission regulations to become enforceable as planned as from 2020?

Source: Drewry Maritime Research

In terms of ensuring compliance, owners indicated that using low-sulphur fuel is the intended solution for the existing fleet in most cases (66%), far ahead of other solutions such as heavy fuel oil with exhaust SOx scrubbers (13%) or LNG (8%), with owners wary of the cost implications for retrofitting.
Q5: How do you intend to ensure emission compliance for your existing fleet?

Source: Drewry Maritime Research

That gap narrows significantly when looking at compliance for newbuilding projects. LSFO is once again the preferred option (37%), but there is far more appetite for LNG (24%) and scrubber-installed ships (21%).
Q6: How do you intend to ensure emission compliance for your current Orderbook and future newbuilding projects?

Source: Drewry Maritime Research

Q7: Based on your answers to Q6 & Q7, will you apply the same emission solution to:

Source: Drewry Maritime Research
Q8: How concerned are you about your ability to become fully compliant by the proposed 2020 deadline? On a scale of 1-5, (5 = extremely; 1 = Not at all)

Source: Drewry Maritime Research

Respondents expressed a high degree of concern (weighted average of 3.3) that external factors will make it difficult to achieve compliance by the 2020 deadline with the availability of low-sulphur fuel the major worry (see Question 9), while a limited capacity to retrofit scrubbers was also cited. The IMO is expected to produce a set of guidelines to owners later this year that will clarify the tolerance levels for non-compliance, which will hopefully allay some owners’ fear of being punished in cases when they justifiably fail to meet the new standards.

Q9: Do you think there will be sufficient availability of low-sulphur fuel to meet demand created by the new regulation? On a scale of 1-5, (5 = extremely likely; 1 = Not likely at all)

Source: Drewry Maritime Research

In terms of future-proofing, some owners expressed concern that the installation of scrubbers may only be a stop-gap solution as a high proportion (weight average of 3.6 to Question 10) believed the further environmental legislation is likely to be introduced in the next decade that could limit or completely outlaw their use. The European Union, for example, ultimately wants shipping to become zero-carbon and is pressing for a minimum 70% cut in carbon emissions by 2050.

“If owners who have invested in compliance with current regulations have their investments rendered obsolete by regulatory changes, it will dis-incentivise future compliance. Rational owners will adopt a wait and see attitude to avoid taking another write-down in the future,” said one respondent.

Q10: Do you expect that more IMO regulation will be introduced in the next decade that might affect the use of current emission solutions being considered? (i.e. scrubbers or LNG or other alternative fuels). On a scale of 1-5, (5 = extremely likely; 1 = Not likely at all)

Source: Drewry Maritime Research

Interestingly, owners considered the new regulations had to some degree inhibited new orders, giving a weighted average response of 2.8 on a scale of 1 = very low impact and 5 = extremely high impact to Question 11. Some of the comments indicated that market conditions were still the primary driver of ordering behaviour and that if there has been any pull-back it will have been from speculative orders. As such, we consider that the IMO regulation has had some beneficial impact by tempering “reckless” orders.
Q11: Do you think the proposed low-sulphur regulation and/or the prospect of future regulation is inhibiting new orders? On a scale of 1-5, (5 = extremely high impact; 1 = very low impact)

Source: Drewry Maritime Research
Q12: Do you expect the new regulation to drive more orders for LNG-fuelled ships? On a scale of 1-5, (5 = extremely likely; 1 = Not likely at all)

Source: Drewry Maritime Research

One likely consequence of the new bunker standards is that more owners will opt for LNG as a fuel, following recent high-profile orders from the likes of CMA CGM. Respondents gave a weighted response of 3.1 to Question 12, indicating that such ships will become a more common sight in the future.

Some of the comments to Question 12 and 13 suggest that owners believe that take up of LNG-fuelled ships will likely be greatest for ships that have fixed sailing patterns (such as liner shipping) in areas with sufficient infrastructure.
Q13: In your opinion is there sufficient LNG bunkering capacity/infrastructure worldwide for the LNG fuel demand expected? On a scale of 1-5, (5 = extremely likely; 1 = Not likely at all)

Source: Drewry Maritime Research

Whatever solution owners adopt, one thing is clear from the survey: the new regulations are expected to increase fuel costs with nearly all owners predicting substantial price premiums for MGO/distillate fuel over the current HFO costs.

Q14: What price premium for MGO/distillate fuel versus HFO do you expect the new low-sulphur regulations to create when they come into force in 2020?

Source: Drewry Maritime Research

Our view
Meeting the new bunker standards is a very real concern to many owners and the sooner the IMO can provide clarity on its enforcement the better. Owners must brace themselves for additional opex and capex costs associated to the legislation.